Retirement, What’s That?

John Bogle, founder of Vanguard, speaks of three “retirement” legs, Social Security, Defined Pension Plans, and Defined Contribution Plans. The first two are broken but fixable. The third is wounded and with continued misuse, won’t help either. Boogle, however, remains optimistic.

Hmmm.

So what is retirement? Normally, many of us think of the “golden years” when we can put our feet up and relax. Or move to Florida and sit in the sun… or take that cruise we always heard about but never got around to taking.

Retirement is also that time when our employer tells us we no longer fit in the company’s future. So sometimes the next move is becoming a Walmart greeter or finding an open park bench. But what does one live on?

Social Security, a pension, and savings are the three Bogle is thinking about. But is that enough for everyone?

Social Security is heading for the junk yard unless some modifications are made. Tax revenue must be increased or payments must be reduced if Social Security is to remain solvent. Increasing the earnings subject to Social Security withholding and changing the inflation formula have been proposed as easy fixes. No fixes, big future problems.

Pensions are even a bigger problem. In the past pension were the defined benefit type. Each employee was promised a certain amount of money when he/she retired. This promise was based upon the employer putting aside a certain amount of money and investing this money at say 8% per year. Financially this approach would produce the promised retirement benefit. So what is wrong?

Businesses as well as public service employers (States and Localities) unfortunately do not always grow and stay healthy. Sometimes they suffer losses and choose to defer payments into the retirement fund. Even more deadly, public and private employers cannot find 8% investment opportunities or the ones they find are deemed too risky. So, less contributions and lower interest (more like 3-5%) make the formula for defined pension unworkable.

Define contribution plans were originally tax advantaged savings plans. Employees save and often employers contribute too. Defined contribution plans (401Ks) are now becoming the primary pension plan vehicle. These plans are not only subject to the market return but are also tied to how much employees actual decide to save and whether they decide to “borrow” against their 401K. How much will be there at retirement is an unknown.

Hmmm. Worried?

Consider this. The US average earnings is about $50,000 per year. Lets say this person saves 10% each year ($5,000) and his 401K averages 3% return each year. At retirement, the 401K will have grown to $245,000. Investing that at 3% will deliver about $7,000 each year. So retirement looks like social security plus $7,000 for the year.

Keep in mind that most Americans save far less than 10% per year, and most employee sponsored 401Ks have some employer contribution. Therefore, the “average” person might accumulate retirement savings of about $250,000. (hmmm, I wonder about their children’s college education and any wedding expense…) Social Security payments of about $1,000 per month are reasonable estimates. That equates to a monthly income upon retirement of about $1,600 a month.

Hmmm.

This example applies to the average. It looks even bleaker for those earning less. Playing with the numbers, one can see that a comfortable retirement means much higher income than the average of $50,000 per year.

So what’s the point of all this.

The US is a large country. With over 300 million residents, there are a lot of people who will be looking at difficult circumstances in retirement. Why then do we have a Congress that does not seem to see its role in engendering conditions where the average income can grow, and where rules governing the financial sector are enacted to ensure a fair shake for those dependent upon long term growth?

It is not Congress’ job to manage human behavior. If people do not choose to save, this lies beyond the proper role of government. What does not lie beyond, is the widening gap (as well as outright stagnation) of middle class income and that of the top 2%. What also does not lie beyond Congress’ scope are sound Social Security and Pension systems.

This is not a left-right, democrat-republican, progressive-conservative issue. For Congress, until America’s largest growing segment (the retired), are adequately protected from financial ruin, all other issues pale in comparison.